Analysis: No rebound yet, but some U.S. companies see European bottom

Ben Berkowitz

6 Min Read

(Reuters) - The corner is far from turned in Europe, but for some U.S. companies there is a sense that they have reached - or can at least see - a bottom after years of weakness, a welcome change that could help boost profits in 2013.

The euro hit a fresh 14-month high on Friday after new data on European factory activity suggested the region was on track to start growing again this year, underlining the opportunity for well-placed U.S. businesses.

“The solid growth in Europe is encouraging in light of the economic headwinds that continued in the region,” Kevin Farr, the chief financial officer of toymaker Mattel (MAT.O), said on a conference call on Friday.

It is not just toys, either. Software maker Citrix Systems Inc (CTXS.O) said last week that things had stabilized, partly as people grew accustomed to doing business in a rocky market.

“People are becoming more adjusted to the expectations, how to work with customers, how to think about backlog and the timing of getting individual transactions closed,” Citrix CFO David Henshall said.

Strategists say that after years of delayed spending, and in some cases fruitless waiting for an economic turnaround, companies are now happy just to have Europe in a state where it is not eroding the bottom line.

“We don’t expect or even want any growth from you as long as you don’t hurt us,” said JJ Kinahan, chief derivatives strategist at TD Ameritrade, of the general corporate attitude toward the Continent.

SPENDING PICKS UP

Among others also forecasting a flattening out or slight pickup in some European segments in recent days were U.S. Steel (X.N), staffing firm Manpower Inc (MAN.N) and package delivery company United Parcel Service Inc (UPS.N) (which had a European acquisition fall through but still saw signs of stability).

Some companies suggested there was something of a “budget flush” at play - European companies spending in the fourth quarter after protecting capital all year and delaying projects as a result. The risk exists they could do the same this year, though it remains too early to tell.

Companies are looking for more services for the money they do spend, getting more value for their investments, according to Charles King, principal analyst at California-based tech consultancy Pund-IT. “That’s being reflected in different kinds of ways by different companies.”

On the consumer side of the equation, companies say there are pockets of strength they want to exploit this year, while cutting back quickly on areas where margins are pressured.

That said, there are still plenty of companies that have warned the situation is not getting any better or even worsening, particularly those with automotive exposure like Ford Motor Co (F.N), Johnson Controls (JCI.N) and Harman International HAR.N; as well as some industrial concerns like gas supplier Air Products and Chemicals (APD.N) and scientific instruments maker PerkinElmer (PKI.N).

RETAIL INVESTORS PERK UP

Those early signs of a European bottoming-out have started to trickle down to investors as well.

Stocks have been on a tear this year, with the benchmark S&P 500 up 5.1 percent in January for its best month since October 2011. In Europe itself, shares have neared two-year highs as well.

A top brokerage executive last week said people seem to be noticing the calming atmosphere in Europe, especially as things in Washington remain unresolved.

Signs of recovery are fragile and uncertainty about U.S. budget negotiations remain, but “Europe seems to have settled down, at least for the time being,” TD Ameritrade Corp AMTD.N Chief Executive Fred Tomczyk said Thursday at the firm’s annual conference for investment advisers in San Diego.

EUROPE DOESN’T SEE IT

While Americans may be increasingly optimistic about Europe, The picture from the European front line is still murky.

There are signs the economy may finally be turning, with the Markit Eurozone Composite PMI, which gauges business activity across thousands of companies, rising in January to a 10-month high - although it is still below the 50 mark that signifies growth.

The fledgling European recovery remains skewed heavily to Germany, Europe’s largest and most successful economy, while other countries, including France, are struggling.

Given their higher exposure to fragile home markets, European CEOs are decidedly less upbeat about business prospects than their U.S. counterparts.

Just 22 percent of Western European CEOs said they were “very confident” of growing revenues in the next 12 months against 33 percent of those in North America, according to a survey by PricewaterhouseCoopers presented at the World Economic Forum in Davos two weeks ago.

Looking three years ahead, 51 percent of American bosses were very confident against only 34 percent of those in Europe.

Automotives are a particular black spot in Europe, with car sales extending their declines in France, Spain and Italy last month. But other industrial sectors also remain stuck in the doldrums, with German engineering group Siemens (SIEGn.DE) and Swedish home appliances maker Electrolux (ELUXb.ST) - two European bellwethers - both seeing little improvement in the euro zone economy in the months ahead.

That is why people like Pund-IT’s King say companies still have to tread lightly.

“I do think that people are still approaching the market there with a great deal of caution,” he said. “There’s still good reason for caution.”